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Second Mortgage in Charge-Off Status

What are the ramifications of a second mortgage in charge off status?

My husband is unemployed and we have fallen behind on our first and second mortgage. We have a plan setup that should take care of the first mortgage, but our second mortgage is in charge-off status. My question is would it be okay to let it get charged-off? What are the ramifications of this?

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Woman putting foreclosure sign on house | Foreclosure, mortgage and charge off
Highlights

  • If you default on your second mortgage, the mortgagee can foreclose.
  • Try to work out a forbearance plan.
  • Bills.com offers additional information for people in default on their second.

Before addressing the central issues in your question, let us define charge off.

Charge Off

Charge-off (sometimes called write-off) is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of the last payment. The fact an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings. I explain more about the ramifications of a second mortgage in charge-off status in just a moment.

Quick tip

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A charged-off account does not mean:

  • The debt is canceled
  • The debt is forgiven
  • The creditor forfeits a right to collect the debt

The creditor may move a charged-off account to its own internal collections department, or sell the debt to a third-party collection agency.

Second Mortgage Foreclosure

Home loan lenders have the right to foreclose if you fail to make your payments for any mortgage. The fact a second mortgage is in a junior position to the first mortgage does not prevent the second mortgage lender from foreclosing.

Try to work out some sort of a payment arrangement with your lender for the second mortgage to avoid a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, a good rule of thumb is the bank can proceed with the foreclosure process if mortgage payments are not received within 150 days. See the Bills.com Foreclosure Rules resource to learn the specific rules for your state.

If a foreclosure occurs, the second mortgage is paid after the first mortgage is repaid in full. If the sale price is less than the value of the mortgages held against it, then in most states you will owe a deficiency balance. The good news is a deficiency balance (if it exists and if your lenders pursue collections) is an unsecured debt you can enroll in a debt settlement program. However, some states outlaw the collection of mortgage deficiency balances. See the Bills.com Anti-Deficiency resource to learn the rules for your state.

Quick Tip

Wrestling with a tough unsecured debt problem? Take your questions to the Bills.com Debt Coach for an online, no-nonsense, no-cost analysis of your options and the cost of each.

Here is the good news: Lenders don’t like to foreclose on mortgages. Foreclosures are costly, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current.

To do so, however, communicate with the lender and be honest about your financial situation. The lender’s willingness to help with current problems will depend heavily on past payment records. If you have made consistent, timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. If you are falling behind in payments or who know you are likely to do so soon, contact your lender right away about meeting to discuss alternative payment arrangements.

Loan Workout Plan

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure. Therefore, it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short-term or long-term, and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting temporary indulgence. Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a repayment plan. This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump-sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Foreclosure, Generally

Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much at all costs. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.

You can find more in depth information about foreclosures on our Bills.com foreclosure information page. See also Home Affordable Foreclosure Alternatives Program.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

290 Comments

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  • MA
    May, 2014
    Michael
    State of NJ - I opened up HELOC (2nd mtg) on primary resedencein 9/2005 for $80k w/HFC. I defaulted & HFC Charged Off HELOC in 7/2009 HFC sent ridiculously low Settlement offers from 2009 - 2013. In early 2013 the Settlement offers increased so I panicked a bit. They gave settlement in writing for 10% ($8k) of total amount due by 7/13/2013 & it would report "Account Settled In Full" & "HFC will issue a Satisfaction of the Lien on your Real Property." I accepted. They were rushing me to pay by 7/13/2013 HOWEVER I missed the deadline. I felt like something was "off." I called HFC weeks later in 8/2013. Now they SAID "We cannot provide you anything in writing BUT we will still HONOR the original Settlement you have in writing." I sent cert funds in 8/2013 for $8k. I was nervous they would not accept anything at all at this point. In 9/2013 I received a letter dated 9/20/13 stating "account paid in full for less than full balance" and there was no Satisfaction on Property. Received 2013 1099-C Debt Descr: Credit Loan Code: F Amt of debt discharged: $71,870 I'm not concerned with the way it reports - due to fall off 6/2014. Questions: * They collected my money after 6 yrs. Is the Statute of Limitations 6 years for a Home Equity (mtg) in NJ? * Does "Settled In Full" vs "Acct paid in full for less than full balance" have anytghing to do with 1099? * Do I have any recourse? * Can I fight to get the Satisfaction of Lien on my Real Property?" HELP
    0 Votes

    • BA
      Jul, 2014
      Bill
      If I understand your facts correctly, you:
      • Defaulted on a HELOC sometime in 2009
      • You accepted a settlement offer in July 2013
      • You paid HFC in August 2013, which HFC accepted
      • As of today, HFC has not released the lien on your property

      I presume HFC promised to release the lien and any other claims against you in exchange for $8,000. If so, the deal you and HFC reached is called an accord and satisfaction.

      Based on my interpretation of the facts you shared, you have a cause of action against HFC for breach of contract. Consult with a New Jersey lawyer who has mortgage litigation or civil litigation experience. He or she will advise you of your rights.

      0 Votes

  • KS
    May, 2014
    Karyn
    Well, when our lender (GMAC) that held our 1st and 2nd went backrupt, the first went to Ocwen and we don't know where the 2nd went! We received nothing for 2 years regarding the second....now we are getting foreclosure threats from a lender we never heard of before? Is it legal for the 2nd holder to come after us when they have never communciated or sent us a statement????
    0 Votes

    • BA
      May, 2014
      Bill
      The law calls your argument estoppel — a party who sits on their rights for too long loses them. The trick here is whether a court in your state would find that sitting on the right to collect a mortgage for two years is long enough for an equitable estoppel defense to work for you. I don't know the answer to your question, and your best source for a good answer is to consult with a lawyer in your state who has mortgage litigation experience. This is small but growing specialty in the legal world, so you may have to spend some time searching for an expert. Start with your State Bar Association.
      0 Votes

  • LB
    May, 2014
    Liz
    My husband and a family member bought a home together, the family member walked away from the mortgage and we could not pay the entire note each month so we sold the house in a short sale. The second mortgage lender accepted our short sale and released the lien and settled for less than owed. We were completely free from this mortgage. Now 2 years later we are buying a home and when sent to underwriting a foreclosure shows up on the report. Our lender believes this is because they reported an I-9 to the credit bureau's. Can they report this as a foreclosure and not change their reporting even though they accepted the short sale and money for the sale of the house.
    0 Votes

    • BA
      May, 2014
      Bill
      The possible short sales misreportings are probably not the source of your problem. The problem is when the short sales occurred.

      Whether you qualify for a loan at this moment depends on the loan originator, the underwriting rules it is following, and who it hopes to sell your loan to.

      Read the Bills.com article Foreclosure, Bankruptcy or Short Sale in Your Past? You May Qualify For FHA, VA, Fannie Mae, or Freddie Mac Mortgages to learn if you qualify for a home loan.

      If you qualify for a loan and and a short-sighted underwriter is using the possibly incorrect credit report information as the excuse for your application denial, ask your loan officer if you can write a statement that explains the circumstances surrounding the short sales, and that the creditor is misreporting the information found on one or more of your credit reports.
      0 Votes

  • KR
    Apr, 2014
    Kari
    I am attempting to obtain a mortgage modification on my first and second mortgage through US Bank. US Bank is dragging their feet and we have been in this process for nearly 8 months now. I found out today that US Bank charged off our second mortgage, which is included in our modification process. In addition, US Bank has added an additional line on our credit report that should be part of our second mortgage. All of this has happened without any notification from US Bank. What does this do to our modification attempt? Also, can they legally add lines to a credit report for things that are part of the second mortgage?
    0 Votes

    • BA
      Apr, 2014
      Bill
      Write-off/charge-off is an accounting procedure that does not change the legal status of a consumer's loan. A lender is not required to give a borrower any notice it is about to write-off/charge-off a delinquent account.

      We do not know what, if anything, writing off the second means to your mortgage modification. The mortgage servicers are inconsistent in their procedures, policies, and timing of modifications it is impossible to say if the write-off means anything. That's an unsatisfactory answer, but the best anyone outside of US Bank can say.

      What to do? Try to stay on top of the representative at US Bank who's handling your modification, and keep the lines of communications open.
      0 Votes

  • WJ
    Apr, 2014
    Whitney
    HI I started with 2 loans, got behind and applied for a modification. I included both mortgages but then was told by the modification agent that the 2nd had been written off and no longer valid. I was then advised to continue with modification without including the 2nd mortgage. Fast forward to today and within the last year my 2nd loan that was charged off by GMAC states on my credit report that it was done in March 2011, Ocwen who now owns my second says that it was charged off in Sept 2013. How do I get documentation of the original charge off in March 2011?
    0 Votes

    • BA
      Apr, 2014
      Bill
      Charge-off is an accounting term, and has no significance under law. I do not understand what you would gain by having evidence that GMAC charged-off the loan in 2011.

      The document you are probably more interested in seeing is any 1099-C that may or may not have been issued in 2011.
      0 Votes